MW: Treasurys edge higher ahead of week's first debt auction
By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) -- Treasury prices rose Monday, pushing yields down, ahead of the government's sale of 30-year inflation-indexed securities, the first major auction of the week.
With no U.S. economic reports scheduled for the session, traders looked toward data slated for release later this week and gyrations in U.S. stocks, which erased most of their opening gains.
Yields on 10-year notes (UST10Y 2.61, -0.01, -0.42%) fell 1 basis point to 2.61%. Bond yields move inversely to prices, and a basis point is 0.01%.
Yields on 2-year notes (UST2YR 0.48, -0.01, -2.43%) declined 2 basis points to 0.48%, near the lowest level on record.
Yields on 30-year bonds (UST30Y 3.68, +0.02, +0.41%) inched up by 2 basis points to 3.68%. Last week, the securities touched their lowest yield since April 2009.
Benchmark 10-year notes have staged a strong rally for the past four weeks, pushing yields down to their lowest levels since March 2009.
Last week, surprisingly weak economic data spurred a rally in bonds, while stocks fell as investors sought the relative safety of government debt. See Friday's report on bond rally.
"In the very near term, there is limited upside for Treasurys" maturing in 10 years or less, said strategists at Nomura Securities.
Auction plan
Until 1 p.m. Eastern time, the Treasury Department will accept bids on $7 billion of Treasury Inflation Protected Securities, known as TIPS. See recent bond-auction results.
The sale is a reopening of February's sale of 30-year TIPS, meaning the securities will carry the same coupon and mature on the same date as the original securities. Before this year, the U.S. hadn't sold 30-year TIPS since 2001.
At the last sale of 30-year TIPS, bidders offered to buy 2.23 times the amount of debt sold, according to CRT Capital Group.
Indirect bidders, a group that includes foreign central banks, bought 42.4% of the auction. Direct bidders, a class that includes domestic money managers, bought 6.4% of February's sale.
TIPS pay investors a coupon plus the rate of inflation as determined by the government's consumer price index. The gap in yields between TIPS and regular Treasurys of a similar maturity reflects what investors anticipate the CPI will average over the life of the bond.
The break-even rate between 30-year TIPS and regular Treasurys shrunk to 1.92% on Friday, falling about 14 basis points from the previous week, according to Barclays Capital.
While some recent economic data have prompted analysts to ponder the possibility of deflation -- a decline in year-over-year prices -- the break-even rate indicates that's not a fear for TIPS investors, said strategists at Morgan Stanley Smith Barney. The break-even rate suggests expectations for benign inflation ahead.
But a lower inflation threat means that investors don't need much protection from inflation, said John Applegate, the firm's chief investment officer, in a report -- and that could limit demand for Monday's auction.
"Given the amount of slack in developed economies, we expect underlying inflation rates to remain low for some time," Applegate said. "We believe there is better value in other segments of the bond market."
Gains may be limited as traders gear up for the remaining short-term note auctions this week. Traders tend to try to push prices lower ahead of an auction to get a better deal on the new securities.
On Tuesday, the government will sell $37 billion in 2-year notes, followed the next day by $36 billion in 5-year notes (UST5YR 1.42, -0.03, -2.34%) .
On Thursday, the U.S. will auction $29 billion in 7-year notes (UST7YR 2.03, -0.03, -1.27%) .
Part of the rally in recent weeks has been due to investors shifting asset allocations to more neutral in Treasurys from underweight, CRT strategists David Ader and Ian Lyngen wrote in a research note.
"The upshot is that if we are getting strong buying, really any notable buying, at these levels the buyers are making a bet which is that the economic outlook warrants further drops in yields," they said. "Supply this week, thus, will prove a good test of investors' resolve and outlook to that prospect."
